©Uniper

Klaus Schäfer’s abiding memory of a year studying in Oxford in the early 1990s is jumping off Magdalen Bridge into the Cherwell river on Guy Fawke’s night.

“It was a bit chilly,” he says, with classic German understatement.

Next month he takes the plunge again, as the company he runs, Uniper, makes its debut on the German stock exchange. The reception might be just as icy.

Some have predicted that its share price could slump on the opening, a prospect Mr Schäfer says doesn’t faze him. “You can’t evaluate Uniper’s stock market success based on a single day,” says the Uniper chief executive at the company’s Düsseldorf headquarters. “With a spin-off, you typically look back after a year.”

Uniper’s demerger from its parent company, the utility Eon, is the most dramatic corporate response so far to Germany’s Energiewende, its radical policy shift towards renewable power.

The change has been disastrous for Eon. The electricity it generates from coal and gas has been squeezed out of the market by subsidised wind and solar, while all that cheap green power has pushed down wholesale energy prices, from €60 per megawatt-hour in April 2011 to about €27 now. Eon’s market capitalisation has collapsed from its most recent peak of €105.7bn in January 2008 to €18bn.

The company has responded by splitting itself in two. It is holding on to renewables and energy distribution and hiving its fossil fuel power plants and energy trading unit into Uniper. Eon shareholders will receive one share in Uniper for every ten Eon shares they hold.

Many welcome the split. “Theoretically the sum of the parts of Eon and Uniper should be greater than the current Eon, because the spin-off will create more transparency and optionality,” says Thomas Deser, portfolio manager at Union Investment.

But perhaps inevitably, Uniper has been dismissed by some as the energy equivalent of a “bad bank”.

In roadshows across the world over the past six months, Mr Schäfer, who was previously Eon’s finance chief, has sought to dispel that impression. Uniper’s fleet is, he says, a lot more diverse, both by country and technology, than people think: its hydropower stations in Germany and Sweden are, he says, some of the “crown jewels of the energy market”.

It also has a “very strong physical commodities business”, which contributed a quarter of earnings last year and includes interests in gas pipelines, gas storage facilities and a huge gasfield in Siberia. Uniper also owns Russia’s third largest private power generation company.

But the response from potential investors has been mixed, according to people present at the roadshows. Some, worried about sanctions, are reluctant to have any exposure to Russia. Others got their fingers burnt with Eon and are not keen to dive into another German utility.

The caution is understandable. Uniper’s pro-forma financial statements show net losses in all of the past three years. The company’s value on Eon’s books was €15.5bn at the start of the year: now it’s just under €12bn. Some analysts think it is not worth much more than €5bn.

Mr Schäfer says it makes more sense to look at Uniper’s operational performance than its net income, which has been affected by repeated writedowns of its power generation assets. There, the picture is not so bleak: its adjusted earnings for the first half of this year were €1.5bn, up 50 per cent on the previous year.

Other factors have combined to improve the outlook. Power prices have been ticking up, for example. Sweden is abolishing a nuclear tax that weighed on Uniper’s reactors.
The UK is moving ahead with plans for capacity payments, which reward companies like Uniper for providing back-up power to intermittent renewables.

Other countries are also making positive noises about capacity markets, though the German government is against them: the economics minister has called them “welfare benefits for power stations”.

Berlin’s position could soften, however. “The closure of Germany’s nuclear power stations in 2022 means a tightening of the German power market which will lead . . . to an increased likelihood of capacity payments,” says Peter Crampton, analyst at Macquarie.

Uniper has, meanwhile, come up with a plan to reduce debt and improve its credit rating, currently one notch above junk. It will cut costs and gradually reduce capital spending, and sell €2bn of assets: Uniper will be “run for cash”, Mr Schäfer says, and will this year pay a dividend of €200m, implying €0.55 a share.

Nevertheless, the first day of trading could be hairy. Since Uniper will not be part of Germany’s Dax index, some tracker funds that own Eon stock will automatically have to rotate out of Uniper shares.

Others, sceptical of Uniper’s prospects, might also sell. “The attractiveness or not of Uniper depends on where you expect commodity and power prices to go,” says Mr Deser. “My impression is that the power price, at least, is going to remain under pressure for a good while to come.”